Professional’s Input on Natural Gas

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I read your blog almost every day and enjoy the insight.  I trade a little bit (when I have some time), and follow some of your Slopers recommendations and strategies.  I have posted a couple of times recently.

I read your post recently on Natural Gas, and thought I would send you a note....{professional information removed at author's request}…..  

I wanted to point out that UNG is not the best way to play the eventual price rebound.  There is some serious contango in the market (so much so that the current price of $2.73 for Oct is just under 60% of the Dec contract at $4.69).   Prior to current month expiry, the UNG ETF “rolls” the contract to the next month.  When this roll takes place, they sell the current month at say $2.73 and buy the next month at $3.89 (current price of Nov).  When they do this the price of UNG does not change as it ends up buying a higher priced contract for which to trade around (they try and match the percentages of the change in price).  Effectively, your cost base gets eaten away by the contango and you lose out on the current contract price.  The only way it makes sense to buy an ETF like this is when there is backwardation in the market of the underlying commodity.

Further, the better way to play this would be to look at HNU in Canada, which is 2X the daily change in nat gas.  The benefit here is that you get the exchange rate change in a falling market, but the underlying ETF still works off the percentage change of NYMEX Natural Gas.  Still has the same contango issue.